Bonuses have been a part of investment banking compensation for decades, since the time when most investment bankers worked for small, private partnerships who couldn’t afford big salaries but could reward performance in banner years. That could all change given the mood in Washington and on Main Street, and even some senior bankers feel it might not be a bad thing.
The public outrage at AIG bonuses has prompted Congress to impose a 90 percent tax on bonuses paid to banks that receive more than $5 billion in TARP money. Yet even Ken Lewis, Chief Executive at Bank of America, expects that banks will shift their pay structure further away from big bonuses. The current pay structure encourages “behavior that was not appropriate,” said Lewis in an interview with the Charlotte Observer.
In a good economy, bankers view their bonuses as an entitlement, instead of a reward for performance. It’s also an incentive to “bet big” without fear of personal consequences. “If you win, you make millions. If you lose, there’s always next year, or there’s always another job, and by the way, the new job probably comes with a six-figure sign-on bonus,” says Laura Hanf, vice president of Pearl Meyer & Partners, a compensation consulting firm in Charlotte.
Bonuses are unlikely to go away completely, of course. But the balance between salary and bonus may approach parity. Banks could start paying more of their bonuses in a combination of stock and cash, as well, to encourage workers to take more of a long-term interest in the success of the company and to manage risk better.